Apartment investing in Auckland has become popular over the last 5-10 years especially in the major cities on New Zealand.
Whereas, older Kiwi’s grew up on a 1/4 acre section with a dream of having their own home on a piece of land, young people’s lifestyles have changed.
Apartment living attracts lots of young people who are wanting to be close to the action. Restaurants, bars and shops on your doorstep; marvelous views that traditional home owners can only dream of; full security; facilities like gymnasiums and pools in the building or at the very least a short walk away and valuable weekends not spent gardening or maintaining the lawn.
Even retires are looking at down grading to apartments as there is less maintenance needed especially if gardening is not your thing and they can spend more money on travel than their own house up keep.
From an investors perspective apartment investing generally offers high returns, good tenant demand and possible higher tax advantages for some investors due to proportionately higher depreciation schedules.
Also, some apartments can offer an overseas investor an Auckland holiday home when required and for the rest of the time a rental stream. What’s more in the present market purchasing an apartment for investment well below replacement cost is the norm.
Apartment investing has a significant portion of “emotional margin”.
Let me explain a little more about what this means.
Examples of property with high “emotional margin” are beachfront property, quality owner occupied homes, homes near good schools and homes in well-established suburbs. Such properties often have net rental yields as low as 2% to 3%.
The higher the emotional margin the lower the real rate of return.
As a rule of thumb, the cheaper a property is in any given area the higher the expected rate of return, this would be true if you were investing in small towns where you expect high yields but low capital gain.
Apartment investing, being cheap compared to surrounding housing options, expectedly show high gross returns. However, as explained above, apartments contain a high “emotional margin”, so they should have lower returns.
What we actually find is that the real rate of return is masked by various unseen costs.
1) Fees: While the gross returns initially appear better than houses with land, once body corporate and other fees are deducted the returns are often less than normal housing.
2) Capital gains: It is not unreasonable to expect capital gains from good quality apartments, however the probability of achieving capital gains is far less than with well located houses with land.
3) Control: When you buy a house and land investors generally enjoy freedom and control. With an apartment, the types of tenants in the building, upgrades to the building, neighbours, noise, appearance, use of common areas etc, which directly affect the value of an investment are all effectively out of an investor’s control.
4) Adding value: Your ability to add value to your investment apartment is limited to an interior redecoration. With house and land, investors have unlimited opportunities to add value.
5) High LVR: Banks always want a larger deposit for apartment investing due to the higher risk that apartments contain.
Whether you are investing in a house and land or apartment investing the most important factor is looking at the numbers and weighing up the risks. I talk a lot about “True Value” to my students and apartment investing does not fit a True Value investment.
I have been a property investor for over 13 years and have created a multi-million dollar portfolio including residential and commercial. I could go on about this but I’m not here to impress you but to impress upon you that YOU TOO can create wealth through property whether that be $100K or $5 million. I've been through the boom - bust - boom so I know what it takes to stay in the market. I live locally in Otahuhu with my wife and new baby boy. I love to help and teach people about buying well and for long term. We can all make a quick buck but the real strategy is creating long term wealth.
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